Why nonprofit CEOs are leaving

The Chronicle of Philanthropy conducted a wide-ranging survey of CEOs and found that about one-third are planning to leave their jobs within two years, with 22% likely to leave the nonprofit industry entirely. Although job satisfaction is high, 88% of the respondents describe the demands on them as “never-ending,” and almost 60% struggle with work-life balance.

According to the Chronicle, almost all of the CEOs surveyed agree that the benefits of their jobs outweigh the negatives (97%) and that they feel tremendous satisfaction in their jobs as nonprofit leaders (96%). But 90% also feel tremendous pressure to succeed, which helps explain their impending exodus. Retirement ranks as the top reason for their departures. Other leading reasons include salary and the challenge of finding resources. Notably, about 40% of respondents say their boards aren’t engaged.

Employee volunteerism on the rise

An Association of Corporate Citizenship Professionals survey reveals that employee participation in volunteer activities in the workplace increased in 2023, with companies offering a greater variety of options and time off for volunteering. In addition, in-person and virtual volunteering options have become standard in corporate volunteer programs as remote work has become more common.

Sixty-one percent of the corporate social responsibility and environmental, social and governance professionals surveyed reported greater employee participation rates. Only 14% experienced drops in participation. Companies boosted their rates by providing, among other options, increased opportunities for group volunteering (59%) and more focus on in-person volunteering opportunities (48%). Some also have added more options for individual volunteering and increased their employee engagement budgets in 2023. Almost a third of those surveyed also introduced or increased skills-based volunteering.

New ban on noncompete agreements may cover nonprofits

The Federal Trade Commission (FTC) recently issued a final rule that generally prohibits noncompete agreement with employees. The rule — which is facing court challenges — also will rescind existing noncompete agreements for most workers if it goes into effect after its September 4, 2024, effective date. Although some believe that 501(c)(3) organizations are outside the FTC’s authority because they’re not “corporations” under the FTC Act, the agency maintains that not every tax-exempt organization is beyond its jurisdiction.

The FTC contends that it has jurisdiction over “so-called nonprofit corporations, associations and all other entities if they are in fact profit-making enterprises.” In particular, it rejects the notion that all hospitals and healthcare entities claiming tax-exempt status fall outside its authority. To determine whether an organization is “profit-making,” the FTC considers 1) whether the corporation is organized for, and actually engaged in, business for only charitable purposes, and 2) whether either the corporation or its members derive a profit.

Does your nonprofit pay one or more of your officers to provide services? If so, you’ll need to consider the risks. Recently, a court found a nonprofit responsible for unpaid employment taxes on an officer’s compensation.

Close ties

The nonprofit in question was founded by a real estate developer and author of multiple books on real estate development. In the years preceding the nonprofit’s inception in 1980, the founder held seminars on real estate development as a sole proprietor. He also served as a corporate officer of the organization from inception through the relevant time periods in the case.

The organization was inactive almost every year until 2010, when the founder developed an online real estate development course. He had complete control over it, was the only instructor and often worked more than 60 hours a week on it. The course was the organization’s only activity and tuition payments were its sole source of income.

For the tax year ending May 31, 2015, the founder signed the organization’s IRS Form 990, identifying himself as its treasurer. The nonprofit issued him a Form 1099-MISC, “Miscellaneous Income,” reporting $120,000 paid in 2014. It never filed quarterly employer tax returns specifying payments made to him as salary or wages for services provided as an employee.

After the IRS selected the nonprofit for audit, the organization asserted that the founder wasn’t (and never had been) an employee for purposes of federal employment taxes. The IRS disagreed and the nonprofit turned to the U.S. Tax Court for relief from the agency’s employee determination and the related tax bill.

Court analysis

As the Tax Court noted, the term “employee” for tax purposes includes any officer of a corporation, unless the officer:

1. Doesn’t perform any services or only performs minor services, and
2. Neither receives, nor is entitled to receive, any direct or indirect remuneration.

An officer can operate as both an employee and an independent contractor, as long as clear distinctions are drawn between the dual roles. When an officer’s services are responsible for the entirety of the organization’s income, though, and the officer receives remuneration, that individual is classified as an employee. The founder provided services that represented the nonprofit’s entire source of income and was paid for those services.

The nonprofit nonetheless argued that the founder provided services as both an employee and an independent contractor. The only evidence of this, though, was the Form 1099-MISC and the founder’s testimony. Without other evidence, such as a written contractor agreement, the form and the “self-serving” testimony warranted little weight, the court said.

It also rejected the assertion that the minor services exception applied, finding he performed significantly more than that for the organization. He worked on all aspects of the nonprofit’s only activity and the organization paid him for those services.

Finally, the court deemed the argument that he couldn’t be an employee because the organization didn’t have the right to control him unpersuasive. The founder chose to accept both the benefits and burdens of the corporate form, including its separate tax identity. Tax law doesn’t permit a taxpayer to use his dual role as an officer and a service provider as grounds to ignore the imposition of federal employment taxes on wages.

Time for caution

The nonprofit in this case may have been atypical in some ways, but it highlights one of the potential pitfalls when lines are blurred for officers of an organization. If you have officers providing services, let’s further discuss the proper treatment for tax purposes.

Raffles are commonly used by nonprofit organizations as a way to raise funds. But that doesn’t mean that raffles are without challenges. IRS rules surrounding gaming apply, as do state and local laws. Not knowing the rules may come back to haunt your organization.

UBI ramifications

Nonprofits must pay income tax on unrelated business income (UBI), defined as income from a trade or business, regularly carried on, that isn’t substantially related to the organization’s exempt purpose. The IRS considers raffles to be a form of gaming, which is a trade or business. Thus, your raffle income may be subject to UBI tax.

If you routinely hold raffles, it’s possible they could be considered “regularly carried on,” and raffles likely aren’t related to your exempt purpose. In addition, losses in another unrelated trade or business can’t be used to offset UBI generated by your raffle.

But, raffle income can be exempted from UBI tax if the raffle is conducted with “substantially all” volunteer labor. The term hasn’t been formally defined, but the IRS’s unofficial guideline is that 85% or more of the labor running the raffle should be from volunteers. Keep records to document your level of volunteer support.

IRS reporting

Your nonprofit must report when the winnings are $600 or more and at least 300 times the amount of the winner’s wager (the raffle ticket price). You can deduct the wager amount when determining if the $600 threshold is met. For example, let’s say you sell $5 tickets and your winner receives $2,500. Because the winnings ($2,495) are more than $600 and more than 300 times the amount of the $5 wager, you must report the winnings to the IRS.

You should file Form W-2G, “Certain Gambling Winnings,” and give a copy to the winner to show reportable winnings along with any related income tax withheld. The winner should provide you with their name, address and Social Security number on Form W-9 or Form 5754, to include with the filing.

Income tax withholding

Your organization will need to withhold federal income tax from any winnings and remit that amount to the IRS if the proceeds (the difference between the winnings and the amount of the wager) are more than $5,000. If winnings aren’t in cash (for example, a vacation package or motor boat), the proceeds are the difference between the fair market value (FMV) of the item won and the wager amount. If the value of a noncash prize isn’t obvious, obtain a valuation before the drawing.

You must withhold 24% in tax from the winnings. Note that the 24% rate applies to the total amount of the proceeds from the wager, not just the amount that exceeds $5,000. Say that you hold a raffle with $2 tickets and the winner receives $7,000. Because the proceeds ($6,998) exceed $5,000, you must withhold $1,680 ($6,998 × 24%).

For noncash prizes valued at more than $5,000, your organization has one of two options:

1. The winner reimburses you the amount of withholding tax that you must pay to the IRS, or
2. You pay the withholding tax on behalf of the winner, calculated at 31.58% of the FMV less the wager amount.

Taxes withheld from raffle winnings must be reported on Form 945, “Annual Return of Withheld Federal Income Tax.” Include the total amount of tax withheld that you reported on all the Forms W-2G filed for the year. File by January 31 following the close of the tax reporting year. If taxes withheld are under $2,500 in total, you may remit to the IRS when filing Form 945. If they’re greater than $2,500, you must remit them electronically on a monthly or semiweekly basis, depending on the total tax.

Finally, confirm that winners furnish a correct Social Security number to your organization. Otherwise, you will usually be required to withhold 24% of raffle prizes for federal income tax backup withholding.

A winning ticket

Everyone likes the idea of raffles, but be sure you know what tax reporting may be necessary before you feature one in a fundraiser. In addition to your federal tax ramifications, it’s important to follow all state and local tax obligations. Contact us to make sure your raffle meets all the requirements.

The U.S. Department of Labor (DOL) released a new final rule in the spring of 2024 changing the salary threshold for determining whether employees are exempt from federal overtime pay requirements under the Fair Labor Standards Act (FLSA). Although the new rule took effect July 1, 2024, opponents have already filed litigation challenging it. Here’s what you need to know while the lawsuits play out.

Overtime test

The FLSA requires that employers pay nonexempt workers overtime pay at a rate of 1.5 times their regular pay rate for hours worked per week that exceed 40. Employees are exempt from the overtime requirement if they fulfill the following three tests:

1. Salary basis. The employer pays the employee a predetermined and fixed salary that isn’t subject to reduction based on variations in the quality or quantity of their work.
2. Salary level. The salary isn’t less than a specific or threshold amount.
3. Duties. The employee primarily performs executive, administrative or professional duties.

The new rule raises the threshold for the salary level in two steps. Previously, most salaried workers who earned less than $684 per week or $35,568 per year became eligible for overtime. On July 1, 2024, the threshold rose to $844 per week or $43,888 per year. On January 1, 2025, it will climb further, to $1,128 per week or $58,656 per year.

Notably, the increases employ the same methodology that the previous rule used (which could make it more likely to withstand court challenges). But that rule also is the subject of a lawsuit.

Highly compensated employees

The new rule also increases the total compensation requirement for highly compensated employees (HCEs) who are subject to a looser duties test than employees who are paid less. Now, they’re required to “customarily and regularly” perform only one of the duties of an exempt executive, administrative or professional employee, versus primarily performing such duties.

The former rule applied to HCEs who performed office or non-manual work and earned total compensation (including bonuses, commissions and certain benefits) of at least $107,432 per year. The salary threshold rose to $132,964 per year on July 1, 2024, and will go up to $151,164 on January 1, 2025.

Under the final rule, all salary thresholds will be updated every three years, based on current earnings data from the most recent available four quarters of data from the Bureau of Labor Statistics. The DOL can, however, temporarily delay a scheduled update due to unforeseen economic or other conditions.

Nonprofits’ next steps

With the future of the new rule uncertain, your organization may want to err on the side of caution. If you haven’t already done so, review your employees’ salaries to identify those whose salaries exceed the previous level but fall below the new thresholds.

For those employees who are now exempt under the new thresholds, you could increase their salaries to retain their exempt status. Other options include reducing or eliminating overtime hours or paying overtime to these employees. You also can reduce an employee’s salary to offset new overtime pay. Budget adjustments, as well as training for newly nonexempt employees about timekeeping and limits on off-the-clock hours, might be necessary.

Bear in mind that salary alone doesn’t make employees exempt — they also must satisfy the applicable duties test. An employee whose salary exceeds the threshold but doesn’t primarily engage in applicable duties is eligible for overtime pay.

Stay tuned

Litigation over the DOL’s new rule may take time to play out and a court could block the rule while the lawsuits proceed. Your nonprofit should pay close attention and seek professional advice on how to stay on the right side of the law.

Does it apply to your nonprofit?

The U.S. Department of Labor (DOL) has indicated that not all nonprofits are subject to the new overtime rule because they aren’t all covered by the Fair Labor Standards Act (FLSA). For example, the law doesn’t necessarily apply to employers with an annual dollar volume of sales or business less than $500,000. Also, charitable, religious, educational and similar activities generally aren’t considered in the calculation unless they compete with businesses. Only activities performed for a business purpose are included.

But a nonprofit’s employees could still be covered by the FLSA under “individual coverage,” meaning they’re involved in interstate commerce. The DOL defines such involvement broadly. It includes employees who regularly make out-of-state phone calls, handle records of interstate transactions, and travel to other states for work or produce goods that will be sent out of state (including, for example, an administrative staffer typing letters). If your organization regularly interacts with out-of-state contacts, the new overtime rule likely applies to your organization.